ECB unlikely to cut rates before June

The European Central Bank (ECB) is expected to keep the cost of borrowing at current levels when it meets on Thursday, as the rate of inflation is on a downward path. 

Interest rates have remained unchanged since October 2023 but the ECB is considering lowering them in June. 

ECB’s President, Christine Lagarde, said after last month’s meeting of the Governing Council that members were not yet “certain enough” about inflation to consider easing measures. Nonetheless, the case for a rate cut has strengthened since then, with eurozone inflation falling by more than expected in March to 2.4 per cent. The ECB’s inflation rate target set at 2 per cent. 

However, a change of course this week looks highly unlikely after ECB officials have repeatedly said they expect data that will not be available until their June 6 meeting. “We will know a little more by April and a lot more by June,” Lagarde reiterated in late March, referring to data on eurozone wage growth. Furthermore, in June, the ECB will also have its own updated forecasts for inflation and economic growth. 

The ECB’s benchmark deposit rate is currently at a record 4 per cent to contain consumer prices that have risen due to Russia’s war in Ukraine and supply chain disruptions caused by the pandemic. Meanwhile, eurozone inflation, which peaked at more than 10 per cent at the end of 2022, has fallen steadily in recent months and is now expected by the ECB to return to 2 per cent in 2025. 

However, higher borrowing costs have weighed on the eurozone economy as they dampen demand, while households and businesses feel pressured by more expensive loans. The eurozone narrowly avoided recession in the second half of 2023, as it was weighed down by the poor performance of its largest economy, Germany. 

Like other central banks, the ECB is now weighing the best time to change course and support economic growth through lower interest rates without jeopardizing the effort to lower inflation.  

Significantly, the Swiss National Bank kicked off its rate-cutting cycle last month when it cut its key interest rate by 0.25 per cent, making it the first major central bank to do so. 

Meanwhile, the US Federal Reserve, which started raising interest rates earlier than the ECB and has held rates steady in recent meetings, is expected to remain on hold for a while longer. Fed Chairman Jerome Powell said last week that the high benchmark rate was “doing its job” against rising inflation, warning that cutting it too quickly could be “quite disruptive” to the US economy. 

The prospect of the ECB cutting interest rates before the Fed has worried some observers. They argue that lower interest rates in the eurozone could prompt investors to seek higher returns elsewhere, weakening the euro and making imports more expensive – potentially reigniting inflation.